Treasury Yields Reach Two-Year High on Outlook for Fed Tapering (Jan 2014)

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Source: Bloomberg – Treasury Yields Reach Two-Year High on Outlook for Fed Tapering

Notable excerpts:

Treasury 10-year yields reached the highest level in more than two years on speculation the U.S. economy will improve enough for the Federal Reserve to end bond purchases in 2014.

U.S. government securities handed investors a loss of 3.4 percent in 2013, the first annual decline since a record 3.7 percent slide in 2009, Bank of America Merrill Lynch data show. Treasuries also fell in 1999 and 1994, based on the figures that go back to 1978. Data showed claims for U.S. unemployment benefits dropped last week to the lowest level in a month, while another report is forecast to show U.S. manufacturing growth slowed in December.

“Data this week is unlikely to change the market view that the economic recovery in the U.S. is still pushing ahead,” said Michael Leister, a senior rates strategist at Commerzbank AG in London. “But Treasury yields have come a long way, and there may be some correction in the near term. That said, the overall picture is for rates to rise further.”

The benchmark 10-year yield was little changed at 3.03 percent at 8:33 a.m. New York time after rising to 3.05 percent, the highest level since July 2011. The price of the 2.75 percent note maturing in November 2023 was 97 20/32, according to Bloomberg Bond Trader data.

Ten-year yields jumped 1.27 percentage points in 2013. They averaged 3.49 percent in the past decade.

Jobless Claims

Jobless claims fell by 2,000 to 339,000 in the period ended Dec. 28, Labor Department data showed today in Washington. The median forecast of 26 economists surveyed by Bloomberg called for 344,000 claims.

The Institute for Supply Management will say its index for manufacturing dropped to 54.7 last month after rising to 57.3 in November, the highest since April 2011, a separate survey of economists showed.

Ten-year Treasury yields will climb to 3.38 percent by Dec. 31, based on a Bloomberg survey of economists with the most recent projections given the heaviest weightings.

The yield difference between two- and 10-year notes reached 2.67 percentage points, widest most since July 2011, as investors demand higher returns on longer-dated debt to compensate for any acceleration in inflation as growth picks up.

The Fed said after its Dec. 17-18 meeting that it will cut monthly bond purchases to $75 billion from $85 billion starting in January.

Fed Bets

The central bank will pare buying by $10 billion in each of its next meetings before ending the program late this year as the economy strengthens and joblessness decreases, based on the median forecast of economists surveyed by Bloomberg on Dec. 19.

U.S. employers added 195,000 workers in December, after hiring 203,000 in November, economists in another Bloomberg survey forecast before the figures are released on Jan. 10. The unemployment rate held at a five-year low of 7 percent, based on the responses.

The U.S. government plans to announce today the sizes of three-, 10- and 30-year auctions scheduled for three days commencing on Jan. 7. In December, it sold $30 billion of three-year notes, $21 billion of 10-year securities and $13 billion of 30-year bonds.

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